Q:  How would you define your investment philosophy? A : First and foremost, we understand that stock prices reflect expectations for earnings and cash flow. Second, we believe that proprietary quantitative screening and independent fundamental analysis provide an analytical edge. Lastly, our belief is that a rigorous sell discipline is a critical component of a successful investment process. Q:  How do you transform your philosophy into a consistent investment strategy? A : The Westcore MIDCO Growth Fund invests in a diversified portfolio of equity securities of primarily medium-sized companies with growth potential. We employ a bottom-up, team-based decision making process. We use proprietary fundamental research to identify and understand key value-creating drivers. Through independent fundamental research, we evaluate a company’s business by analyzing its financial information, industry, markets and competitors and visiting company operations or interviewing management teams. We build this diversified mid-cap growth portfolio with what we believe are high quality, attractively valued companies with enduring competitive advantages and improving fundamentals and potential for positive earnings revision. Q:  What are the steps in your research process? A : We generally look for companies that have well established management teams, infrastructure, portfolios, and products but are still relatively small and, therefore, possess growth potential. In our opinion, this approach provides for a very attractive risk-reward opportunities. As part of the process, we identify attractively valued growth companies with improving fundamentals in the market cap range of Russell Midcap Growth Index, which provides an extensive array of securities for our consideration. By using a sophisticated and proprietary multi-factor and industry-specific screen, we narrow down that universe to a breakdown of manageable segments. We have seventeen separate industry-specific screens, so we can focus our attention on companies that are best ranking within each of the individual screens. This screening procedure enables us to review with precision what we define as good growth stocks. For us, these are companies that not only have a history of attractive growth characteristics, but they are also showing indications of improvement in their growth by virtue of changes in their earnings growth, either both forecast and/or recent growth as well as sales growth. We also pore over return characteristics as well as the quality and valuation metrics. By quality we mean the ability of a company to be a cash generator. Another aspect of quality would be the direction that we may see in terms of the company’s issuance or repurchase of their own stock. While we regard issuance as being something negative, we consider share repurchase a positive characteristic. Additionally, we use a number of different valuation characteristics which would be specific to the industry we are taking into consideration. That allows us to reduce the universe in more or less half, or even more, to those stocks that will then move on to the fundamental phase of our analysis. The fundamental research is the driving aspect of our process. We identify companies that are good growth companies with favorable growth, quality and valuation characteristics. Essentially, we look for companies that are gaining market share within their industries and whose industries are generally growing faster than average. Finally, when we make our fundamental assessment, we search for drivers for improved profitability for the business, which can be due to the launching of a new product, or changing pricing dynamics that is going on within the industry, or improved cost structure. In our valuation process, we identify and look for the sensitivity of the business relative either to revenue or margin and aim to see what the key drivers are – in other words, whether it is improved revenue growth or margins for the business. Our proprietary discounted cash flow model is the cornerstone of the research process. We use that model to identify the embedded expectations of the market for the company that we are considering, before comparing that relative to our own set of expectations that has been built up from the work we have done through our rigorous research process. Also, every company that we work on must have a minimum of 20% upside based on our valuation work for us to invest in the company, and we seek to realize that upside over a 12 to 18 months time horizon. We meet formally as a team three times a week. One of the meetings is dedicated to presenting new ideas for the portfolios and reviewing some 100 to 150 new stocks a year. The objective of the other meeting is to go over current events relating to individual stocks, and to talk about the industry specifics of the companies that we own. The third meeting that we have focuses on reviewing macro-economic data points and have a more general discussion as it relates to the sector positioning within our portfolio. Q:  What are the major benefits of a team-based management? A : Our research process largely benefits from the team decision making that is undertaken by the portfolio management group. When we talk about a team-oriented process, we have organized ourselves on the basis of overlapping coverage in major sectors. We work as individuals very collaboratively to cover these areas and share information, which fosters a very good discussion and helps us when it comes to making portfolio decisions at the stock level and sector level. Our process is a bottom-up process and the breadth of knowledge that each of one us brings to our coverage is very important throughout our process. Generally, the team makes decisions by consensus of the six portfolio managers. Q:  What are the key metrics to you in terms of measuring growth? A : We consider earnings and cash flow as the most important metrics of growth, as in the end reinvestment of cash flow back into the business maintains the growth profile in the longer term. We emphasize both earnings and sales growth in the near term when we are doing our fundamental analysis. So, we look for those companies that can have importantly accelerating or improving sales and earnings growth. Q:  Would you illustrate your research process with an example? A : One of the best stocks in our portfolios over the last decade has been Netflix, Inc., an Internet subscription service streaming television shows and movies. Our first investment in Netflix occurred in 2003. At that time, Blockbuster was still the predominant means of distribution for rental media content for movies and the like. Netflix at that point had introduced the mail model, wherein they would mail subscribers a DVD who could watch it and return it to them. But their developed and sophisticated distribution network was not appreciated by the market at that point. Our primary thesis was that the situation represented a very attractive model relative to the Blockbuster model, and we had already begun to see the market share gains of Netflix at the expense of Blockbuster. This was driving for a very fast revenue and earnings growth profile for Netflix in those early phases of its development. Presently, Netflix has 29 million plus subscribers and really dominates the distribution of the media content while maintaining the rental DVD business. But along the way we watched Netflix move into streaming content and the ability to provide movies through computers and televisions. When Netflix moved to that juncture of first being offered on a number of different consoles, this represented a dramatic step up in the proliferation of their presence in the market and became a cornerstone for much accelerated growth in their subscribers. There was nobody close to them and they really stayed out in front by getting the head too when it came to buying content. And more importantly, one of the things we identified when they moved into buying content was that they were able to purchase that content in such a way that they had availability to that content and could leverage it through their distribution thanks to the significant margin opportunity. Furthermore, as the company began to more actively stream content we saw another phase of margin improvement, when they started to replace the mailing and distribution cost associated with non-digital distribution with a much lower cost in the digital distribution, something that led to an important phase in their earnings growth. More recently, we have sold our position in Netflix, as we felt that the company is now at a point when the market has largely anticipated this profitability profile of the business. We believe that the company are now probably facing for the first time more cost pressure related to renegotiations on content. Q:  How do you execute your portfolio construction? A : We build a portfolio based on our assessment of the risk-reward of each individual security. The portfolio itself consists of 70 to 85 stocks. In general, our position sizes are in the 1% to 1.5% range and no individual security in the portfolio gets bigger than 5% of the portfolio. That is, in fact, one of our risk controls. Our sector weights are plus or minus 5% relative to the index. We are not market timers. Q:  What is your sell discipline? A : With regard to our sell discipline, we maintain price targets on all the stocks that are held in the portfolio using our proprietary discounted cash flow model. We often sell stocks when they hit our valuation target. We will no longer hold a company when fundamentals disappoint and we find changes in our forecast. Oftentimes, we move out of a position because we find a more attractive new idea that is similar in nature. We sell stocks when they are moving out of the mid-cap range. Historically, that has been around $20 billion in market cap. Finally, we have a proprietary stock failure screen that we utilize to identify the factors that are predictive of where a company is going to underperform significantly. When a holding comes on our failure screen, it is subject to review by our portfolio management group. Following a rigorous discussion about it, we will in most cases remove the stock from the portfolio. Q:  What do you view as risk in the portfolio and how do you contain it? A : The most significant risk in what we do is the forecasting risk that we take whenever we do our valuation work. At the portfolio level, we manage risk by position size, sector constraints and the assessment that we do as it relates to the Northfield model. We use it as a check, so that we can understand if there is any outside bet that we might be taking on a macroeconomic factor that is not sector specific.